On this thought-provoking Blog, English author, David Brear, guides us to the dark heart of a modern-day, totalitarian labyrinth and shines a piercing light on its manipulative rulers and manipulated inhabitants. First, he provides a spool of unbreakable thread so that we can all find our way safely home.

Friday, 28 October 2016

WarningMore than half a century of quantifiable evidence, proves beyond all reasonable doubt that what has become popularly known as'Multi-Level Marketing'is nothing more than an absurd, cultic, economic pseudo-science, and that the impressive-sounding made-up term'MLM,'is, therefore, part of an extensive, thought-stopping, non-traditional jargon which has been developed, and constantly-repeated, by the instigators, and associates, of various, copy-cat, major, and minor, ongoing organised crime groups (hiding behind labyrinths of legally-registered corporate structures) to shut-down the critical, and evaluative, faculties of victims, and of casual observers, in order to perpetrate, and dissimulate, a series of blame-the-victim closed-market swindles or pyramid scams (dressed up as'legitimate direct selling income opportunites'),and related advance-fee frauds (dressed up as'legitimate training and motivation, self-betterment, programs, recruitment leads, lead generation systems,'etc.).David Brear (copyright 2016)_________________________________________________________________________

Keynote Remarks of Federal Trade Commission Chairwoman Ramirez

Direct Selling Association Business & Policy Conference

Washington, DC

October 25, 2016

Direct selling, a $36 billion industry, plays a robust role in the marketplace and has the
capacity to provide consumers with valuable goods and services and an opportunity to try an
entrepreneurial experience. The Federal Trade Commission, as you know, has been active in this
area for decades.
We hear often from members of the direct selling industry, and one of the frequent
themes is the negative public perception about how the industry operates. Multi-level marketers
have a tremendous opportunity to address these concerns by enhancing transparency and
fostering credibility across the industry. There are three important facets to this that I would like
to address this morning: self-regulatory initiatives to improve compliance and level the playing
field; realistic and candid communication about the limited nature of the earnings potential; and
practices showing that MLM companies are making real sales to real customers. I. Self-Regulatory Initiatives The Direct Selling Association works persistently as the voice of self-regulation in this
market. And, as DSA president Joe Mariano has emphasized, the DSA Code of Ethics can play
an important role in modeling behavior for its members. I want to commend the DSA for the
willingness it has shown to continue to work on and improve the Code. Changes were made
most recently in 2015 and 2016. Among other things, the DSA established a mechanism to
handle complaints about the practices of member companies – and for the DSA to publish
reports about those complaints – and included lifestyle representations in the definition of
earnings claims.
2
And, as Mr. Mariano noted, the DSA plans to take further steps next year to bring greater
transparency to the industry. It is encouraging to see both the steps that have been taken so far
and the recognition that this work is far from finished. This activity also reflects that the DSA
has heard, and is open to hearing, concerns from the FTC.
I would like to use the majority of my time to address two areas where multi-level
marketers need to take effective action to halt the practices that understandably damage the
credibility of the whole industry. One is misleading income representations; the other concerns
business structures that are unfair or deceptive because they are not focused on real sales to real
customers. II. Legitimate MLMs Must Accurately Represent Business Opportunities I will start with misleading income representations. Earnings claims, regardless of
whether they are express or implied, are highly relevant to consumers in making their investment
decisions. In fact, we find that earnings claims are often the single most decisive factor in those
choices. So it should be no surprise that the FTC takes earnings misrepresentations very
seriously.
False and unsubstantiated earnings claims are deceptive and unlawful under Section 5 of
the FTC Act. Unfortunately, however, our law enforcement experience shows that many MLMs
continue to misrepresent the amount of money participants are likely to earn. In fact, in all of
our cases against multi-level marketers, the FTC has alleged that the defendants made false
earnings representations. These misrepresentations cause real harm to consumers, and they need
to stop.
A legitimate multi-level marketer must accurately represent its business opportunity and
what a participant is likely to earn. These representations must be truthful, non-misleading, and
3
substantiated. Practically speaking, this means that multi-level marketers should stop presenting
business opportunities as a way for individuals to quit their jobs, earn thousands of dollars a
month, make career-level income, or get rich because in reality, very few participants are likely
to do that. Although it may be true that a very small percentage of participants do have success
of this type, testimonials from these rare individuals are likely to be misleading because
participants generally do not realize similar incomes.
The fact that most MLM participants do not earn substantial incomes is not new. The
low incomes received by most MLM participants is something that the DSA itself acknowledged
more than a decade ago. In 2006, when commenting on the FTC’s Business Opportunity Rule,
the DSA cited a 2002 National Salesforce Survey showing that the majority of direct sellers
made less than $10,000 per year from direct selling, with a median annual gross income of about
$2,400 or only $200 per month.
1
Just last month, Mr. Mariano noted that the majority of multi-level marketing participants
do not earn more than very modest incomes. I commend him for emphasizing that MLMs “must
increase [their] efforts to ensure prospective distributors are fully aware…that for most, direct
selling can [only] provide supplemental income. Most distributors will not realize replacement
income, let alone a lavish lifestyle.”2
It is time that MLM income representations matched the income reality of the majority of
multi-level marketing participants. This means both explicit statements about how much a
participant is likely to earn, as well as implied claims and lifestyle claims. We all know examples of the obvious types of lifestyle claims that can be misleading:
representations that participants can be “set for life” or “make more money than [they] ever
thought possible” and images of expensive houses, luxury cars, and exotic vacations. But there
are also problematic claims that are a bit more subtle, like claims that you can quit your job, “fire
your boss,” become a stay-at-home parent, travel the world, or have the time and money to enjoy
the “finer things in life.” These lifestyle claims – whether made through statements or images –
are deceptive when made to a general audience because participants are unlikely to achieve
them.
Now, some of you may be thinking that what I am saying does not apply to you because
you do not make income misrepresentations and you prohibit your distributors from making
income misrepresentations. However, simply prohibiting your distributors from making income
misrepresentations is not enough. MLMs must take reasonable steps to monitor and ensure that
participants are not misleading others about the business opportunity. In addition, MLMs should
provide sufficient information and training to participants to ensure that they will adequately
understand the business and will not be misled by others.
This message is consistent with the DSA’s Code of Ethics, which states that member
companies must comply with and ensure that their independent salespeople adhere to the Code’s
guidance on earnings representations. As you know, the Code prohibits false, deceptive,
misleading and unsubstantiated earnings representations. And, as the Code acknowledges, FTC
case law provides ample guidance on the subject. I urge you to review FTC precedent and
ensure that any income claims you and your distributors make accurately and truthfully reflect
distributors’ likely earnings. III. Legitimate MLMs Must Be Driven by Real Sales to Real Customers Let me now turn to the second main problem we see in the MLM industry, namely, that
many MLMs have structures that are unfair or deceptive because they are not focused on real
sales to real customers.
A legitimate multi-level marketer must be focused on, and must pay compensation that is
based on, real sales to real customers, not wholesale purchases by its sales force. This is a
familiar concept, but I want to spend a few minutes breaking it down and showing how it
animates FTC enforcement efforts. You can find the concept embodied in Commission
decisions reaching back more than forty years, like the 1974 Holiday Magic opinion, which
stressed the importance of basing multi-level compensation on actual product sales rather than on
purchases by recruits.3
And, as the Ninth Circuit’s decisions in Omnitrition4 and BurnLounge5
made clear, MLMs that pay compensation for product purchases by recruits, rather than for
actual sales to customers, are facially unlawful.
As a practical matter, what does it mean for a multi-level marketer to base compensation
on real sales to real customers? There are four aspects of this core principle that I want to
emphasize:
•

First, a legitimate MLM must be focused on real customers;

Second, a legitimate MLM opportunity must be based on sales that are both profitable
and verifiable;

Third, a legitimate MLM should not use targets or thresholds that are met by mere
product purchases; and

Fourth, the compensation paid by a legitimate MLM must be tied to retail sales.

I will start by explaining what we mean by “real customers.” Simply put, products sold
by a legitimate MLM should be principally sold to consumers who are not pursuing a business
opportunity. For good reason, the law has always taken a skeptical view of paying compensation
to someone based on the presumed “internal consumption” or “personal consumption” of recruits
who are pursuing a business opportunity. When a product is tied to a business opportunity,
experience teaches that the people buying it may well be motivated by reasons other than actual
product demand.
One of the more vivid examples of this comes from the BurnLounge case. The activities
of the BurnLounge defendants included selling packages of music-related merchandise. Before
the FTC brought its enforcement action, anyone who wanted to participate in the business
opportunity was also required to buy a package. BurnLounge had monthly revenues of over
$475,000 from package sales, but those revenues did not reflect consumer demand for
BurnLounge’s merchandise.7
After the FTC filed suit, charging that BurnLounge made deceptive income
representations and paid compensation that was tied to recruitment rather than the sale of
merchandise, the court entered a preliminary injunction that radically changed BurnLounge’s
operations. Under the preliminary injunction, distributors could still buy BurnLounge products if
they liked the merchandise, but they could no longer advance in the business opportunity. What happened to sales? In only two months, they plummeted from over $475,000 to less than
$11,000.8
As it turned out, at most, only a small minority of sales had been motivated by actual
product demand, whether internal or external.
So, what does an MLM organized around real customers look like? You can see one
approach laid out in the recent consent order we obtained in the Herbalife case.9
The order
identifies two classes of people who are not pursuing the business opportunity: “retail
customers” who simply buy product from Herbalife distributors and do not have any direct
connection to the company; and “preferred customers,” who have registered with Herbalife as
customers and do not participate in the Herbalife business opportunity.10 Under the order, there
are a number of requirements that are intended to ensure that preferred customers represent a
genuine class of discount buyers and are not simply business opportunity participants under
another name. Preferred customers, for instance, are not permitted to resell product, recruit, or
receive multi-level compensation.11
The Herbalife order also reflects the law’s justified skepticism of compensation based on
the presumed “internal” or “personal” consumption of recruits who are pursuing a business
opportunity. To address this issue, the order incorporates a number of provisions that impose
reasonable limits on the compensation paid for the consumption of products by business
opportunity recruits. I will highlight one in particular: at least two-thirds of the compensation
paid by Herbalife must be based on sales to retail customers or preferred customers, not on
consumption by business opportunity participants. The second issue I want to highlight concerns the meaning of “real sales.” “Real sales”
are sales that are both profitable and verifiable.
To a certain extent, this is just simple logic. An MLM that pays compensation based on
claimed sales that do not generate a net profit for the individual making the sale, or that cannot
be verified as sales, cannot reasonably be characterized as based on “retail sales.” And, of
course, decisions like Omnitrition and Holiday Magic have long recognized that compensation
should be based on “actually consummated sales” to consumers.13
The Herbalife order also shows how these principles can play out in the operations of an
MLM. It requires that retail sales that generate multi-level compensation for a participant, or
that advance a participant in the business plan, must be both profitable and verifiable. Herbalife
is required to collect verification information for every claimed retail sale and take all reasonable
steps to verify that these sales both occurred as reported and represent genuine purchases by a
true customer.14
Third, a legitimate MLM should not use targets or thresholds to satisfy eligibility for
compensation or rewards that are met by mere product purchases. Because the focus of a
legitimate MLM, and the basis for the compensation it pays, must be real sales to real customers,
business opportunity participants should buy product only in response to actual consumer
demand. For this reason, any requirements or incentives that participants purchase product for
reasons other than satisfying genuine consumer demand – such as to join the business
opportunity, maintain or advance their status, or qualify for compensation payments – are
problematic. As you will recall from the BurnLounge example, these incentives can be
powerful. There the defendants were selling nearly a half-million dollars of merchandise every month and almost all of those purchases were driven by the desire to get ahead in the
compensation plan rather than by genuine product demand.
Under the Herbalife order, the company is prohibited from imposing any requirement
that a business opportunity participant purchase a minimum quantity of products. It also
prohibits business opportunity participants from joining an automatic-shipment or similar
program involving standing orders of product. And, targets or thresholds are permitted only if
they are met exclusively through sales to retail customers or preferred customers.15 These
provisions underscore that an MLM should always be focused on making sales to real customers
who are not pursuing a business opportunity. MLMs should not contrive ways to get their
business opportunity participants to make purchases for reasons other than actual retail demand.
The fourth point I want to highlight is that compensation paid by a legitimate MLM must
be tied to real sales to real customers. If an MLM’s participants buy product that does not result
in real sales to real customers, this revenue should not be used to fund compensation.
It goes without saying that a legitimate MLM should not pay compensation solely for
enrolling or recruiting a new participant. This means there should be no headhunter fees,
recruitment bounties, or anything else of the sort.
For example, in Herbalife, we are requiring the company to track the percentage of
wholesale revenues earned from product that is (i) sold to a retail or preferred customer, or
(ii) within the limits established for compensating reasonable personal consumption by business
opportunity participants. If at least 80% of Herbalife’s wholesale revenue is not accounted for
within these categories, the order imposes a cap limiting the total amount of compensation
Herbalife can pay to its participants. What does this mean in practice? If, hypothetically, half of the product that Herbalife
sells wholesale results in verifiable retail sales as defined by the order and half does not, the total
rewards that the company can pay are limited to the 50% that consists of verifiable sales to
customers. On the other hand, if the vast majority of product purchases are genuine retail sales,
total compensation can be higher. And if they are not, then the total compensation will be much
lower.
All of the points I have highlighted are intended to operate in combination to provide
reasonable assurance that product purchases will be driven by real product demand. Providing
this assurance is both appropriate and necessary; it is not enough for an MLM to simply assume
the existence of real sales to real customers.
Finally, I want to note that, although this is less common today, in the past some MLMs
have sought to rely on policies similar to those referenced in the Commission’s 1979 Amway
decision – specifically, the so-called “buy-back,” “70 percent,” and “10 customer” rules – as a
sufficient basis for assuming that their product is purchased by real customers to satisfy genuine
demand. This reliance is misplaced. The Commission found those policies were effective given
the specific facts in Amway,
17 but neither the Commission nor the courts have ever endorsed
those policies for the MLM industry at large.18 Indeed, the existence of a refund policy and a
low refund rate do not necessarily mean that consumers are satisfied with their business
opportunity, and both the “10 customer” and “70 percent” rules offer, at best, weak and
attenuated evidence of a business focused on real sales to real customers.IV Conclusion Let me conclude by thanking you for allowing me to share some of my thoughts about
reforms that the MLM industry should undertake in order to operate lawfully and prevent
consumer harm. The industry’s self-regulatory efforts to date are steps in the right direction, but
more needs to be done. For our part, the FTC will be issuing further guidance for MLMs, but I
believe the principles that I have outlined today should provide an important foundation for
structuring business practices in the MLM industry in a way that provides consumers with
truthful information and helps prevent consumer harm. Thank you.

Saturday, 22 October 2016

Once upon a time in the land of 'Herbalife' there lived a perfectly beautiful, happy, healthy and prosperous Princess called Leanne:

Leanne Rungay

World Team Member at Herbalife

Basildon, Essex

I've always been the type of person that looks after people. My friends and family I dote on. But I felt like I needed to do more with my life and for other people. I wanted to make my mark and build a community.

I didnt really know how I was going to do this but what I did know was the beginning of last year I looked in the mirror and realised I had made everyone a priority but myself. At 5 ft 8 and 17 stone I wasn't at my best, I was overweight and lazy.

That is when Herbalife found me at a time of need. I have gone on to lose 4 stone so far, over 10% body fat and ive increased muscle mass. But most of all I have tonnes more energy, lots more confidence and live a much more positive life.

I have since gone on to build my own business with Herbalife and I work this around my daughter and my job. Its the best thing I have ever done. I now help other people feel great and reach there health and wellness goals. I support them all the way and the job satisfaction you get from this is like no other.Before Herbalife I couldn't afford a holiday and this year I qualified for 2 trips with them, to Mallorca and Barcelona, they were the best holidays of my life and it was a reward for helping others.

If you would like my help to earn an extra income around your current commitments or want more information on the nutrition programme and how I can support you then please email me at leannerungay@hotmail.com________________________________________________________________________

The fiddling fatty lost five stone in weight and dropped five dress sizes, from an 18 to a slender eight, as she used her ill-gotten gains to transform herself with diet and exercise in the gym.

After losing weight, Rungay posted sexy selfies in skimpy outfits on Instagram and continues to promote herself on the site as a ‘wellness’ coach and distributor for American diet product giant Herbalife.

The mum, of Basildon, Essex, boasts of being able to “help others look and feel great” and tells in a promotional advert how she joined a Quickstart Wellness fit club after starting her diet at the start of 2014.

She transferred a total of £94,934.83 from the company into her own savings account

London’s Westminster Magistrates Court heard how Rungay worked in the billing and payroll department at the Charlotte Street firm.

Prosecutor Kate Shilton said : “‘Whilst employed by Spencer Ogden between 21st June 2014 and 16th September 2015, in the billing assistance and payroll department, the defendant transferred money from the company business account to her own savings account.

The Fact Herbalife Cannot Deny And The FTC Dares Not Name

Summary

Lack of a "pyramid scheme" charge has been cited for Wall Street's ignoring the FTC settlement and continuing to back Herbalife. Some accepted Herbalife's Orwellian claim it was "exonerated.".

The actual reason for Wall Street's and Herbalife's ridicule of the FTC is the agency did not confront the cause of Herbalife wrongdoing, its unlimited income promise with pay-to-play requirements.

The FTC's failure to acknowledge the root cause of Herbalife wrongdoing was a "tell" to investors that the FTC would not challenge the MLM lobby. They've bet on Herbalife's escape.

As cause for the FTC's silence in the face of Herbalife's and Wall Street's scorn some also note FTC Commissioners and officials using MLM as a lucrative post-government career destination.

Wall Street's bet against the FTC may be wrong if Herbalife must prove retail sales. The true facts about Herbalife's recruiting scheme could compel FTC law enforcement.

Three months have passed since the FTC presented its formal Complaint against Herbalife (NYSE:HLF), following a two-year investigation. The Complaint detailed pervasive deception and extensive consumer harm, i.e., unfair and deceptive trade practices under Section 5 of the FTC Act.

Beyond "Pyramid Scheme"

Some have focused on the absence of the term "pyramid scheme" in the FTC statement. Actually, the FTC vividly described the workings of a Herbalife pyramid scheme - payments related to recruiting, financial losses and churning rates of participants, false income promises, and absence of retail profits. Not naming or attempting to prove a pyramid scheme is a legal strategy, also recently used by the Dept. of Justice in criminal fraud charges against the CEO of the MLM, Zeek Rewards. Pyramid schemes are complex "long cons" and there is no federal law against them. Section 5 infractions are much easier to prove.

It was not the avoidance of "pyramid scheme" that is significant but rather the FTC's omission of the underlying foundation of a pyramid scheme, the well spring and the cause of Herbalife's deception and consumer losses. This underlying and uneconomic factor defeats, from the start, any chance of retail sales, and always produces 99% loss rates.

That factor is Herbalife's "unlimited income" promises based on its "endless chain" structure. The endless chain income promise, the most fundamental of all elements of a pyramid scheme, is the factor the FTC does not name because, officially, it endorses this endless chain proposition in its endorsement of "legitimate multi-level marketing", aka "MLM."

Not Denied, Not Even Hidden

Herbalife, for its part, does not - and cannot - in any way try to hide or deny its endless chain model. It is proclaimed as a legal and normal pillar of commerce, passing GAAP and regulatory standards. Herbalife defends the "endless chain" as the foundation of its pay plan and its recruiting activities and the hallmark of the business sector shared with hundreds of others of its type, "multi-level marketing."

In the FTC case against Herbalife, the archetype of MLM, deception and consumer losses were singled out for FTC action. Yet, because the unrestricted endless chain is permitted by the FTC in its endorsement of MLM, the agency dared not speak of the "causes" of Herbalife's global law breaking. The wrongdoing is named, but motive and opportunity are not referenced? Instead, Herbalife was said to be, in some unexplained way, endemicallyfraudulent, requiring "restructuring" to "start operating legitimately."

What then did cause Herbalife, among its MLM peers, to do such bad things and warrant FTC action? While the cause of the illegal practices was not named, the FTC did indicate what were not the causes. It was not due to a ringleader. None was named, like the CEO was in the MLM, Zeek Rewards. It was not accounting malfeasance, as in Crazy Eddy's and Enron. The SEC has not weighed in. It wasn't "rogue" salespeople or complicit managers, who took the fall at Wells Fargo bank. The Consumer Financial Protection Bureau remains silent. Herbalife's wrongdoing, the FTC stated, was embedded in its compensation formula and expressed in its core mission. For this premise to be true, Herbalife must be the ultimate "rogue" MLM, yet the FTC did not claim this either or argue that Herbalife was harming its fellow MLMs.

Exoneration not Condemnation!

Even though the operation of a "pyramid scheme" was not claimed and the causal factor underlying the FTC's list of Herbalife misdeeds was not named, it still would be reasonable that Wall Street analysts and the financial news media would dig deeply into the FTC's condemnations of Herbalife that led to a huge fine and major corrections.

As we know, none of that happened. Instead, Wall Street, and its news media minions, were captivated by Herbalife's stunning, Orwellian response that the FTC's Complaint-Settlement was not an order for fundamental restructuring at all but instead was a government exoneration and vindication of its existing"MLM" business model.

The FTC's litany of specific Herbalife wrongdoings and the punishing measures imposed on Herbalife for it to be allowed to stay in business, including disgorgement of $200 million, were ignored as if they did not exist.

The Fraud Whose Name Dare Not Be Said (by the FTC)

Astute observers have looked past Herbalife's mind-boggling but still predictable denials, and even the media's (also predictable) compliance. They wondered how and why the FTC would allow its own findings and official actions to be publicly negated, grossly misrepresented and misused by a company it had just prosecuted for deceiving consumers!

I submit that the explanation for Wall Street's defiant repudiation of facts and scorning of the FTC is the same factor that also accounts for the FTC's own self-destructive silence while its prosecutorial work is publicly trashed and the Defendant moons the Commission's authority.

The common factor is that the FTC did not and, apparently, feels it cannot address the main and central fraud involved in the Herbalife case, the endless chain income proposition. It is this position that undercuts the entire prosecution and has led some speculators to bet against FTC enforcement.

Indicators of Regulatory Capture

The FTC's revealing failure to acknowledge Herbalife's fundamental flimflam, on which is based its "infinite" structure and "unlimited" income promises, as well as being the root cause of the consumer losses was the "tell" for some on Wall Street of the government's unwillingness to cage the beast it had poked, the beast called "multi-level marketing." The FTC's failure to acknowledge the very nature of the scam gives evidence to some on Wall Street that the "settlement" will follow the FTC's historic - since 1980 - acceptance of MLM as politically insulated from law enforcement by "influenced" members of Congress and, besides that, because MLM is a lucrative career destination for some FTC Commissioners and officials.

Smart money took note that two former FTC Commissioners and one high level official are now on the Herbalife payroll:

Pamela Jones Harbour, Commissioner

Jon Leibowitz, Commission Chairperson

Eileen Harrington, FTC Bureau of Consumer Protection (1987-2009), "with direct responsibility for the FTC's enforcement and regulatory oversight of business opportunities like Herbalife."

Other FTC Commissioners and officials have worked as lobbyists or consultants for MLMs, before or after leaving the FTC:

Timothy Muris, Commission Chairperson (Primerica)

Jodie Bernstein, Director, Bureau of Consumer Protection (Amway)

J. Howard Beales, Director, Bureau of Consumer Protection (Primerica)

David Scheffman, Director of the Bureau of Economics (Equinox)

The appearance, at least, of revolving door and other, potentially, close connections between former FTC Commissioners and officials and MLMs involve intermediary law firms:

FTC Commissioner Julie Brill recently resigned to join the law firm of Hogan and Lovells, a firm that lists Amway and the Direct Selling Association among its clients, and in which partner Deborah Ashford is General Counsel to the DSA "Education" Foundation of which former FTC Commissioner and now Herbalife employee, Pamela Jones Harbour, is a board member. Hogan and Lovells, where Commissioner Brill now works, also filed an amicus brief,opposing the FTC in its case against the MLM, Burnlounge.

FTC, Director of the Bureau of Competition, Richard Feinstein, returned to the law firm, Boies Schiller Flexner, soon after the firm was retained by Herbalife in 2012. Feinstein was appointed to his position at the FTC in 2009 by Commission Chair, Jon Leibowitz, who is now on Herbalife's payroll. Feinstein has moved back and forth between the Boies Schiller and the FTC several times. Boies Schiller recently helped Herbalife fight revelations by short-seller Pershing Capital and to secure a quick and minuscule cash settlement in the most recent consumer class action case of pyramid scheme charges against Herbalife.

Heart of the Pyramid

The "endless chain" is the genesis of all pyramid and ponzi schemes and various other swindles. In the world of "business opportunity" solicitations a perpetual endless chain income promise is equivalent to what a perpetual-motion-machine would be in patents and inventions. Unlike the complex factors involved in a "pyramid scheme" racket, the fraudulence of a perpetual endless chain income promise is pure and recognizable. By its very nature, it meets the conventional definition of fraud: deliberate deception to secure unfair or unlawful gain.

At Herbalife, in classic MLM fashion, this recruiting-based proposition is codified in a contractual agreement with participants of advance-fee collection (fees and quotas of product purchases) with promised rewards (bonuses and royalties) payable upon the perpetual recruiting of new contractors under the same terms, with the new investments serving as funds for the promised reward to the recruiters. This proposition is then marketed as a viable livelihood for millions of people.

In its Complaint and Settlement, the FTC went beyond choosing not to prove Herbalife is a pyramid scheme. It chose to leave out any reference to the source of the racket from which all the itemized wrongdoings and abuses flow, including a definable status of "pyramid scheme." Ignoring the beating heart of the Herbalife scam - the continuous endless chain income promise - gave this classic tool of fraudsters the status of a legal, normal and matter-of-fact business "incentive."

Like Herbalife's astonishing claim of FTC exoneration, the FTC's treatment of the Herbalife "endless chain" created its own reversal of reality. Omission implied legitimacy and viability to this classic trickery. Thus, to bring charges against Herbalife, the FTC had to claim Herbalife had misused the endless chain pay plan and structure of "legitimate MLM", as if a continuous endless chain income promise to all could possibly operate honestly and fairly and really could deliver its promised benefits to all who pay and participate!

Never Denied, but Always Disguised

As an almost magical force capable of mesmerizing millions, the MLM version of the endless chain promise is never denied by Herbalife, but its shifty and voracious countenance is prudently covered with a mask, called "direct selling." In this disguise, the siphoning of money from doomed participants at the bottom is sanitized through product purchases to mimic ordinary consumer transactions and divert attention from the "incentivizing" role of the endless chain promise. The products operate like chips in Las Vegas or a form of crypto-currency, like Bitcoin. Between 35% and 55% of the price of the chips (products) is transferred to the chain of recruiters, with the majority of that total allocated by formula to those in the top 1% of the chain.

With two years of fact-finding, aided by whistle-blowers, independent researchers and consumer activists and with the whole world watching, the FTC had a historic opportunity to escape its political leash by merely acknowledging and describing the foundation of Herbalife's business model. It could have explained and illustrated how the endless chain income proposition itself compels the marketing program toward recruiting and thereby snuffs out retail sales potential. It could have shown how it produces by design, 99% consumer loss rates year after year and necessitates cover-up "disclosures." Instead, the FTC chose to treat the "infinity" aspect of the proposition, an economic Unicorn, as if it really exists, while condemning its effects, as if they were preventable.

Gallery of Endless Chains

To put the MLM endless chain proposition into perspective, it is useful to consider other areas of commercial activity where the endless chain income proposition, under certain conditions, can be legal and permissible or even harmless. These include lotteries, securities and chain letters. Lotteries, chain letters and securities-trading - due to their inherent risk and their win-lose nature and even when they are abused and operate criminally - do not portray themselves as viable Main Street "income opportunities" to replace higher education, trades, jobs and other business ventures. MLMs do exactly this.

Due to the near total losses that lotteries must cause among virtually all participants, state governments oversee or directly operate them. Actual odds to win must be published. Accounting of revenue and rewards is strictly monitored. Most important, lotteries present themselves as games of chance, never as livelihoods to replace jobs. MLMs do exactly this.

Securities must be registered with the SEC. The nature of a security in which value is dependent on future actions of other parties define them as "speculative", and thereby require government oversight. The floating value of a security, based ultimately on what the latest investors believe and will pay, without limit, and always vulnerable to manipulation, is offset by disclosure requirements, government monitoring, and independent analyses of revenue, earnings, book value, and the performance of comparable companies. Security-trading, even under regulation, disclosure rules, monitoring and analysis, does not portray itself as a replacement for jobs for millions of people. MLMs do exactly this.

Only in the MLM version is the endless chain proposition permitted without registration, regulation, oversight and no disclosure requirements of any kind. Only in MLM is the endless chain allowed to be portrayed as a rational replacement for jobs for millions of people. Only in MLM is the investment in an endless chain proposition allowed to be to be called "risk free".

MLM's endless chain marketplace, called the MLM "industry," is not studied by universities and its data are not gathered or monitored by any government agency. There are no independent data beyond those promoted by MLM's own PR and lobbying group, the Direct Selling Association, repeatedly shown to be skewed, exaggerated or at best "anecdotal." There are no independent analysts examining factors of saturation, competition, or historical performance for the investors (participants).

If the MLM "distributorship" were a security, it would be an unregistered penny stock hyped in a boiler room by unlicensed brokers, manipulating the price and lining up buyers and sellers to kite the price.

If MLM were a lottery it would be selling tickets to yesterday's drawing.

If MLM were a chain letter, the persons at the top of the list would never be taken off as more people signed at the end and sent money to those listed above.

The Endless Chain Detonator:Pay to Play

The endless chain in business is potentially toxic by design and, history shows, if not regulated and monitored, it can destroy whole markets or even nations and it can lead individuals to insane and self-destructive actions. By its nature as a transfer, there is no equitable exchange of value. If you profit from it, someone else on the chain or perhaps many others did not.

However, if no money is required to participate, the illusions and fantasies conjured by the income promises of an endless chain become only fanciful and rather innocent. Chain letters, the original endless chain schemes, exemplify this principle. When they charge money for participation, they are illegal in the United States. Why? It is their impossible reward promise based on an illusory "endless" structure. They are fraud per se.

Herbalife's structure and income promise are based on that same model, understood to be inherently deceptive in a chain letter. Yet, at the press conference on Herbalife, the FTC suspended recognition of the inherentlydeceptive nature of Herbalife's structure and related income promise, and FTC officials lamented only that Herbalife did not fulfill its impossible income promises to participants.

When chain letters do not charge money, but only solicit participants to sign on and then send the letter to potential new participants, they become harmless parlor games promising good fortune or offering the chance to spread a wise or silly admonition. The activating spark that makes an endless chain financially lethal is the "pay-to-play" component, sometimes called "payment of consideration."

Yet, besides being unable to acknowledge Herbalife's dangerous endless chain proposition at its core, the FTC also could not take notice of the long and brightly colored fuse attached to the Herbalife explosive, the pay-to-play components built into the MLM pay plan. Herbalife, like all MLMs, is steeped in and totally dependent upon pay-to-play charges.

The legal prohibition against chain letters charging money should be the guide for how the FTC can summarily stop Herbalife's law-breaking: prohibit Herbalife from charging money to participate in its illusory reward planbased on "endless" recruiting.

Reward-based Purchasing

Among Herbalife's pay-to-play costs are registration fees, but those are just the start and not the main ones. The modest registration fees for "startup kits" may be outside the reward plan and not exceed their base costs. The important pay-to-play charges are product purchase quotas to "qualify" for receiving recruiting-related rewards under the pay plan, then monthly maintenance of the qualifying purchase quotas. Personal buying can fulfill or top off the quotas. There are escalating purchase quotas for higher rewards which if not met, result in penalizing lower rates and lead to significant purchasing to avoid the penalty. Add to these, back office and website charges, shipping costs, marketing material purchases, seminar registrations, books, videos, and more. MLM's pay-to-play costs add up to thousands or tens of thousands of dollars for those who bite the hook attached to the end of the chain.

Defusing the MLM Bomb

The simple solution to deactivating MLM's financial IEDs is presented in twoSeeking Alpha articles, one by me, and one by attorney Douglas Brooks. The articles explain that to remove the danger the FTC would just need to prohibitpersonal purchases from being used as qualifiers or measures for recruiting-related rewards. Buying for personal use or for retail marketing purposes or for any other reason would be unaffected, but personal purchases would never count toward the buyer's own quota related to recruiting-related rewards. Everyone on the chain would be free to buy the goods, but personal buying would not help or hurt the buyers themselves regarding their future-oriented, recruiting-related rewards.

With the fuse to the bomb removed, the FTC would then have no need to monitor "retail selling" rates, which is an after-effect of pay-to-play recruiting and which is impossible to do anyway. FTC monitors would just need to read the terms of the MLM's pay plan and enforce the prohibition against any pay-to-play provisions.

Endless Chain Math and Geometry

Just as whistle-blower Harry Markopolos asked the SEC when he famously and unsuccessfully presented that agency with Madoff's impossible ROI data, consumer activists asked the FTC to look at Herbalife's math. The Herbalife income proposition is based upon continuous exponential expansion without regard to saturation. The promised success of each new MLM participant's investment is based upon a mathematical impossibility. "Infinite" expansion and the promise of "unlimited income" are obviously pseudo-economic phenomena. If the FTC had only recognized the implausible claims along with Herbalife's historical recruiting and payout data over multiple years, the investigation would be finished in short order. As Markopolos noted when he realized Madoffs' trading records had to be bogus, it only takes about 5 minutes to see such fraud.

As we know, Herbalife's business, despite the absurd promises and the devastating data, or perhaps because of them, befuddle many people. I have explained and presented to countless journalists the runaway numbers in a typical MLM plan based on each participant recruiting just five others. After the 13th recruiting cycle, the earth's entire population is enrolled, if the chain is not broken. The numbers are indisputable, yet because the MLM scheme endures and continues to recruit, the numbers don't penetrate some minds.

At that point, I turn to pyramid geometry and the work of the recently retired expert on pyramids at the FTC, Peter Vandernat. Dr. Vandernat left the agency with a trove of precise declarations including an explanation of the design of endless chains showing that financial disaster for millions of participant-investors is pre-ordained by the model itself.

He wrote,"In a pyramid scheme the large scale failure to obtain the proposed rewards is not postponed until market saturation. For as long as a successful recruitment pattern is maintained, the names of the most recent recruits change over time, but the percentage of members constituting the most recent layers of recruits does not appreciably change. At whatever enrollment the program may be considered, whether the total membership be large or small, saturation or not, the rules and implementation of the program ensure that the vast majority of members are not in a position to obtain the proposed rewards. For the promoters of the scheme, this feature always limits the liability for required payouts, while also favoring relatively few participants who are at or near the top of the structure. This description is typically true for all stages of recruitment, including those stages that are still far from market saturation. Also, in a pyramid scheme the number of people who lose money increases exponentially for as long as a successful recruitment pattern is maintained. From the perspective of consumer protection, it is always better that a pyramid scheme fail sooner rather than later."

Applying his description to the "each get just 5" chart, it shows that the hapless and unprofitable recruits in the bottom two levels make up 96% of the total downline! Yet, even with the math calculations and Dr. Vandernat's explanation, the mystifying capacity of the MLM endless chain scheme to endure leads some otherwise perceptive individuals to swallow the "direct selling" narrative and ignore the recruiting reality.

The Secrets of Saturation and Breakage

The math projections and the pyramid's malevolent design are often overwhelmed by reports of continued recruiting, pious denials of wrongdoing by well dressed MLM executives and scenes of ecstatic new recruits pouring into "extravaganza" recruiting rallies. The mind cannot easily hold those apparently positive images alongside the gruesome facts of 99% "losers", perjury about retail sales and 50-80% annual churn of "quitters." MLM persistence becomes an unfathomable mystery to some people.

As in the Wizard of Oz or a Tony Robbins "fire walk", the explanation for the mystery is behind the curtain and through the smoke. In the MLM case, the saturation of whole populations that the recruiting model would seem to lead to is mitigated and managed - for the MLM enterprise - by Factor X, the undisclosed or obscured rates of quitting. In the "biz", the quitting pattern is called "breakage."

Insiders understand breakage as the key to a MLM enterprise's longevity and a windfall to top recruiters. As lower-level recruiters finally quit, whatever residual revenue they may have created from recruiting flows to the levels above. At Herbalife, 66% of all rewards wind up in the hands of the top 1% of recruiters. This is no accident, but the planned result of a carefully formulated top-loaded reward plan with the upward transfer compounded by "breakage" which the plan's authors fully anticipate.

Ironically, the fitful and profitless migration of millions of unwitting consumers joining and quitting MLMs constitutes MLM stability. The quitting keeps the MLM from imploding. The churn and loss rate are not signs of abuse of the MLM model but an integral and necessary part of it. The model is based, as all endless chains are, on transferring money within the chain from later participants to earlier ones. Each "winner" requires many losers, which leads to large-scale quitting.

The fabled MLM income plan dazzles the new recruits with visions of an explosively growing downline - 5+25+125+625 = 780 in just 4 cycles! In reality, 70-80% of new recruits quit within a year as "failures" and most are unable or unwilling to recruit others. The entire chain turns over at a 60% rate. Recruiting often does not keep up with quitting. Only by invading more geography is the MLM enterprise able to show continued "growth". This "growth" is not from building upon a base but is only the net gain of relentless recruiting over constant quitting. Huge troughs of saturation and decline in established areas are papered over with "growth" in new areas, the classic "pop and drop."

If it can replace its 60% of quitters, the MLM enterprise itself does not face "saturation." But the hundreds of thousands joining each year at the end of its "endless chain" are robbed blind by it. For any significant number among that huge base of new recruits to build large "downlines" is mathematically, demographically and economically impossible. They are doomed by design, and fated to lose from the start, as Dr. Vandernat explained.

Saturation may be a distant forecast for the MLM enterprise itself, as long it can keep replacing quitters and expanding globally. The baffling and brutal consequences of saturation are "externalized" by the MLM scheme to all new recruits soon after the scheme is launched. Any significant number of recruits at the end cannot possibly "duplicate" the recruiting numbers of the "winners" on the extravaganza stage. Saturation for the participants is not a far-off event. It is the immediate andpermanent MLM state. Constant "breakage", experienced as loss, disappointment, and self-blame among millions of "losers", is how the MLM manages saturation, while it proclaims another year of "growth."

Hidden Data

There is a critical data point that no one has ever seen and the FTC did not report, despite two years of fact-finding with subpoena power. If known, it would instantly reveal the savage impact of saturation on Herbalife recruits and the ill-gotten profit to the company and its top promoters.

The data point may be expressed in this analytical question: How many people, in the USA for example, have ever become paying contractors (distributors) for Herbalife since it opened its doors in 1981? Out of all those millions of individuals, how many ever gained any net profit?

If only 1% can be shown to be profitable during one year, the percentage of profitable participants among all who paid in over the last 35 years would be infinitesimal. The 1-percenters remain in place year after year while the 99-percenters churn and accumulate. The actual winners, stated as a percentage of the true total would be as close to zero as one could graphically illustrate.

Memory Recovery

Could it be that the FTC does not know about the inherent fraudulence of anyendless chain allowed to operate unregulated and unmonitored?

Does it really not have data on the historical destructiveness of MLM income propositions and "business opportunity" solicitations?

Is it really unaware that MLM's "incentivize" personal purchases with recruiting-based rewards as stated in the compensation plan?

Does it not see how its enforcement policies since 1980 have created a protected haven for the nation's only "endless chain" enterprise without regulation, disclosure or oversight?

Does it really not know that the endless chain will, by geometric design, always produce massive loss rates, and that MLM schemes survive by churning and replacing 60% of the participants every year?

Could it be that the FTC believes most MLMers make money from retailing? Does it think MLM retailing is even feasible, when the MLM enterprise perpetually inundates all areas with competitive "salespeople" and offerswholesale pricing to anyone breathing?

Or could it be that the FTC - and many of us too - have forgotten? Are we like people under a dictatorship who forget what free speech and assembly are? Have we forgotten that an endless chain income proposition is inherently deceptive? Did we forget that law enforcement used to stop this kind of virally-spreading fraud from infecting commercial markets?

Fortunately, there are some who do remember and there are statutory records to reference, laws still on the books that just need dusting off after years of lack of use. Consider the language prohibiting " chain distributor schemes in Wisconsin :

"Unfair trade practice: The promotional use of a chain distributor scheme in connection with the solicitation of business investments from members of the public is an unfair trade practice under 100.20 Stats. When so used the scheme serves as a lure to improvident and uneconomical investment. Many small investors lack commercial expertise and anticipate unrealistic profits through use of the chance to further perpetuate a chain of distributors, without regard to actual market conditions affecting further distribution and sale of the property purchased by them or its market acceptance by final users or consumers. Substantial economic losses to participating distributors have occurred and will inevitably occur by reason of their reliance on perpetuation of the chain distributor scheme as a source of profit."

Similar clearly-worded state statutes are in North Carolina and in California among others. Additionally, there are attorneys, regulators and economists to help with memory recovery. The author of the Wisconsin statute and regulations, Bruce Craig, retired Asst. Attorney General, continues to offer his experience and insights to the FTC, universities and the business media.

Despite the FTC's conspicuous omission of the source of Herbalife's wrongdoings - its endless chain structure and compensation plan and the incendiary factor of "pay-to-play" purchasing - the FTC Settlement with Herbalife is a game-changer in one important way. Herbalife is to be required to show that 80% of all its sales are made to people who are not part of the pay plan, true end-users, outside the chain. Herbalife's model and reward plan are based on a closed market that focuses on recruiting and transferring money among the recruits inside the chain. Any significant level of bona fide retail sales have never been documented.

Most important under the Settlement terms, Herbalife, not the FTC, must bear the burden of proving the existence of these mythical retail sales. Until now, the FTC carried that impossible responsibility of searching for what did not exist, and proving the absence of retail sales by extrapolating data among millions of churning individuals who are "independent" of the offending MLM enterprise.

End Game Scenarios

Could it be that Wall Street's reading of the FTC "tell" is wrong? Many observers were so skeptical of FTC's prosecutorial-will they expected the two-year investigation to conclude with a shameful white wash. They were happily proven wrong and have acknowledged the FTC for breaking a 30-year precedent in taking on Herbalife.

There is also a plausible case to be made that the FTC has soberly recognized its historical dilemma and the impossible mission of "proving" retail sales as the anti-dote for an inherently deceptive endless chain business model, now called "multi-level marketing." And, rather than take on the MLM lobby directly and its paid friends in Congress, the FTC will just let the facts of Herbalife - the poster child of MLM - come to light and serve as a mandate and guide for law enforcement on all MLMs.

If that is true, it is no wonder Herbalife has gone into full-blown denial. In the reality-based world where Unicorns, perpetual-motion-machines and "endless chains" don't exist Herbalife has no other option.